Coverdell Education Savings Account

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A Coverdell Education Savings Account (also known as an Education Savings Account, a Coverdell ESA, a Coverdell Account, or just an ESA, and formerly known as an education individual retirement account ), is a tax-advantaged investment account in the U.S. designed to encourage savings to cover future education expenses (elementary, secondary, or college), such as tuition, books, and uniforms (for the same year as the distribution). It is found at Section 530 of the Internal Revenue Code (26 U.S.C.   § 530). Coverdell ESAs were first introduced under the Taxpayer Relief Act of 1997. [1]

An individual retirement account (IRA) in the United States is a form of "individual retirement plan", provided by many financial institutions, that provides tax advantages for retirement savings. An individual retirement account is a type of "individual retirement arrangement" as described in IRS Publication 590, individual retirement arrangements (IRAs). The term IRA, used to describe both individual retirement accounts and the broader category of individual retirement arrangements, encompasses an individual retirement account; a trust or custodial account set up for the exclusive benefit of taxpayers or their beneficiaries; and an individual retirement annuity, by which the taxpayers purchase an annuity contract or an endowment contract from a life insurance company.

Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. Governments establish the tax advantages to encourage private individuals to contribute money when it is considered to be in the public interest.

The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code (USC). It is organized topically, into subtitles and sections, covering income tax in the United States, payroll taxes, estate taxes, gift taxes, and excise taxes; as well as procedure and administration. Its implementing agency is the Internal Revenue Service.

Contents

The tax treatment of Coverdell ESAs is much the same as that of 529 plans with a few important differences. Like a 529 plan, Coverdell ESAs allow money to grow tax deferred and proceeds to be withdrawn tax-free for qualified education expenses at a qualified institution. However, the definition of qualified expenses in an ESA includes primary and secondary school, not just college and university.

A 529 plan is a tax-advantaged investment vehicle in the U.S. designed to encourage saving for the future higher education expenses of a designated beneficiary. In 2017, K–12 public, private, and religious school tuition were included as qualified expenses for 529 plans along with post-secondary education costs with passage of the Tax Cuts and Jobs Act.

The account is named for its primary champion in the US Senate, the late Senator Paul Coverdell (R-GA).

Paul Coverdell American politician

Paul Douglas Coverdell was a United States Senator from Georgia, elected for the first time in 1992 and re-elected in 1998, and director of the Peace Corps from 1989 until 1991. Coverdell died from a cerebral hemorrhage in Atlanta, Georgia in 2000 while serving in the United States Senate. He was a member of the Republican Party.

The Tax Cuts and Jobs Act of 2017, signed into law December 22, 2017, allows 529 plan funds to now be used for K-12 education. Families wanting to use a tax-advantaged account for saving for private schooling may now use a 529 account instead of a Coverdell account. Existing Coverdell account balances may optionally be rolled over to a 529 plan to simplify accounts. [2]

Tax Cuts and Jobs Act of 2017

The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, Pub.L. 115–97, is a congressional revenue act of the United States originally introduced in Congress as the Tax Cuts and Jobs Act (TCJA), that amended the Internal Revenue Code of 1986. Major elements of the changes include reducing tax rates for businesses and individuals, increasing the standard deduction and family tax credits, eliminating personal exemptions and making it less beneficial to itemize deductions, limiting deductions for state and local income taxes and property taxes, further limiting the mortgage interest deduction, reducing the alternative minimum tax for individuals and eliminating it for corporations, reducing the number of estates impacted by the estate tax, and cancelling the penalty enforcing individual mandate of the Affordable Care Act (ACA).

Important differences from 529 plans

Education in the United States
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Important similarities to 529 plans

The Expected Family Contribution (EFC) is an estimate of a student's, and for a dependent student his or her parents', ability to contribute to a year of post-secondary education expenses. The EFC is used in the student financial aid process in the United States to determine an applicant's eligibility for need-based federal student aid, and in many cases, state and institutional (college) aid. It is located on the Student Aid Report and Institutional Student Information Record sent after the Free Application for Federal Student Aid (FAFSA) is processed. If the FAFSA has not yet been filed, there are a number of calculators on the Web that will give a good approximation of a family's EFC.

See also

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References

  1. ↑ "H.R.2014, 105th Congress".
  2. ↑ Pickering, Kathy (2017-12-27). "Changes to Education With Tax Reform". HRBlock. Retrieved 2018-01-12.
  3. ↑ "Intro to ESAs" . Retrieved 2012-07-05.
  4. ↑ "Coverdell Education Savings Accounts".
  5. ↑ "IDeal - FAQs" . Retrieved 2013-10-19.
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